Investment Property Loans and Rising Interest Rates-Should You Be Worried?

As a real estate investor, you likely know the importance of keeping one eye on your current investments and another eye on fluctuating market conditions. Successful investment is a delicate balancing act, with a constant gauge of the level of acceptable risk versus potential return on investment.

As tools to help you accomplish your goals, investment property loans must have competitive rates and terms favorable to your projected outcomes. How will rising interest rates affect your real estate investing strategies? Do rising rates signal a time to slow down in real estate investment? Here are some things to consider.

The answer to this question lies largely with which funding source you use. Rates offered by traditional financial institutions tend to be tied to the 10-year treasury rate, and are reactive to fluctuations in the market. On the other hand, many fix and flip investors use hard money lenders as financing sources, because hard money lenders offer quickly funded loans with comparatively short terms of a few months to a year. Hard money rates do not move in lockstep with the treasury rate or the rates of traditional lenders. This is one of the many benefits of working with a hard money lender.

2) How will rising rates affect property values?

Though there is a widely held view that rising interest rates drive property values downward, the evidence does not support that theory. In fact, there appears to be no strong relationship between house prices and interest rates. Mark Palim, vice president for applied economic and housing research for Fannie Mae, states:

“Rates tend to rise because, in a relative sense, the economy is doing well, incomes are going up, people can afford more and they’re willing to take out a larger mortgage. Intuitively, you’d think that if interest rates go up, of course, house prices go down. But they don’t.”

Though small fluctuations usually occur when there is a change in the interest rates in either direction, in general, housing prices adjust accordingly within a short time.

3) How do rising interest rates affect potential buyers?

This is the question that haunts most fix and flip investors. When interest rates rise, conventional wisdom indicates that the pool of qualified buyers is reduced. However, this concept bears closer examination. Consider two aspects of this situation that may work in favor of a fix and flip investor:

When the Fed signals that interest rates will rise, what is the result? Often, the housing market sees a jump in activity, as qualified buyers who may have been delaying their entry into the market for one reason or another decide to lock in lower rates before they increase. In this case, the pool of potential buyers actually increases in the short term. But what about the long term?

In the long term, the potential pool of buyers can be reduced. Those who are borderline qualified may be pushed completely out of the market altogether. This may sound like bad news for fix and flip investors interested in flipping their rehabbed properties quickly. However, there may be a silver lining to this cloud. Those buyers who are not eliminated by rising interest rates are generally more credit-worthy than their hapless companions. This means that while there may be fewer candidates for your home, those candidates that are there will be more likely to actually qualify for a loan. This weeding out of questionable buyers can save you time and effort that might have otherwise been spent on negotiating uselessly with a buyer that is in no position to get proper funding.

Staying the Course

In a volatile market, fix and flip investors achieve success by following the same guiding principles that always work. Vigilance is key. Being aware of the market conditions, carefully weighing risk versus reward, and making carefully-considered investment decisions will ensure your profitability over the course of time.

If you would welcome more information about funding your fix and flip investment, please contact us. As private money lenders with years of experience, we can provide fast, affordable funding for your investment project today.

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